Thursday, 12 July 2012

Euro hits 2-year low versus dollar on global growth concerns

By Julie Haviv
NEW YORK | Thu Jul 12, 2012 12:23pm EDT

A sculpture showing the Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt June 29, 2012. REUTERS/Alex Domanski
(Reuters) - The euro slumped broadly on Thursday, reaching a new two-year low against the dollar, as worries about global economic growth and diminished expectations of near-term U.S. Federal Reserve stimulus had investors avoiding risk.

The traditional safe-haven Japanese yen strongly outperformed both the euro and U.S. dollar after the Bank of Japan limited itself to tweaking its asset buying program rather than easing monetary policy. That was in contrast to recent policy easing moves by central banks in the euro zone, Britain and China.

"The environment is negative for the euro and pressure is mounting against it," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.

A test of the June 2010 low of $1.1875, according to Reuters data, is a material risk. However, the threat could be temporary given chances a strong dollar could spark more aggressive Fed policy that would weaken the greenback and support the single currency, according to Sutton.

A test of the June 2010 low of $1.1875, according to Reuters data, is a material risk, but that could be temporary as a strong dollar is likely to increase the risk of more aggressive Fed policy, according to Sutton.
"As long as the door is open to QE3, it is difficult to see an environment where the dollar can prove materially and sustainably strong," she said. "Accordingly, we continue to expect the euro to trend lower, but avert a collapse."
Minutes from the Federal Reserve's June meeting released on Wednesday showed the Fed is open to a third round of quantitative easing to stimulate the economy, but the recovery might need to weaken for a consensus to build.
With speculators and long-term currency investors worried about Europe's lack of progress in tackling its debt crisis the euro fell to $1.2165, its lowest since mid-2010. The euro, which has slipped for three straight sessions, was last down 0.3 percent at $1.2204.
Against the yen, the euro fell to a six-week low of 96.40. It last traded at 96.74, down 0.9 percent on the day.
Highlighting the euro zone's economic fragility, the European Central Bank said in its monthly bulletin that growth in the 17-country bloc is weak and "heightened uncertainty" is weighing on confidence.
The euro has shed 5.8 percent of its value versus the dollar so far this year, already exceeding the losses it chalked up in 2011, with losses accelerating after last week's cut by the ECB.
"Every single central bank except for the Fed is easing, and until that happens we expect the dollar to stay supported," said George Saravelos, G-10 currency strategist at Deutsche Bank.
"The euro is likely to weaken further as it will be hurt by the ECB's decision to cut the deposit rate and there will be a shift in funding."
ECB policymakers held out the possibility of taking further measures to boost the flagging euro zone economy after a cut in their deposit rate to zero showed no sign of jolting banks into lending out more money.
The ECB's unprecedented cut in the deposit rate meant that banks will earn nothing for parking excess funds at the central bank. Besides, the zero rates would encourage investors to sell the low-yielding euro and buy higher-yielding riskier currencies.
The Bank of Japan held its policy rate in a range of zero to 0.1 percent, though it did tweak its asset-buying and lending program.
The dollar was last down 0.6 percent at 79.28 yen, holding above chart support at the 200-day moving average around 79.01 yen.
The dollar had briefly gained against the yen after data showed the number of Americans lining up for jobless benefits last week fell to a four-year low. To be sure, fresh evidence of a cooling global economy was reflected in a separate report showing U.S. import prices falling sharply in June.
Governor Masaaki Shirakawa said on Thursday the BOJ would not automatically link its policy with that of other central banks.
Markets are anxiously awaiting Friday's second quarter gross domestic product growth number from China, which is expected to show one of the few growth engines in the world economy is faltering.
A Reuters poll showed economists expect China's growth to have slowed to 7.6 percent in the second quarter, its worst performance since the 2008/09 financial crisis.
(Additional reporting by Anirban Nag in London; Editing by Andrew Hay)